Week's ETF picks return to gold

After a break from the yellow metal, it's time to get back in.

By InvestorPlace Oct 25, 2010 9:32AM

By Jaime Dlugosch, InvestorPlace.com


Exchange-traded funds in my buy list last week were successful, and I’m looking for the upward trend to continue this week.

 

We did a nice job last week rotating out of the gold and mining ETFs. The precious-metals market took a breather last week after enjoying a nice run over the previous several weeks.

 

The same cannot be said for the rest of the market. I was expecting a pause in stocks and made recommendations for both long and short exchange-traded funds as the place to be.

Instead, the S&P 500 posted a robust gain of 0.5%.

 

In my market-neutral position, investors following my Top ETFs to buy last week posted a more modest gain of 0.15%. In four weeks of making top ETF picks we are up 3.6% versus 3% for the S&P 500.

 

So what happened last week?

Investors can trace the gains to earnings and strong indications that the Federal Reserve will son execute quantitative easing in support of the economy. Such a move is very supportive for stocks.

 

The dollar gained as the Treasury voiced support for the greenback. Of course, currency traders know full well that central banks are notoriously bad at manipulating money prices.

For the dollar to increase in value, investors will start to worry when rates go up. Given that the Federal Reserve is in a mode of easing policy, it is unlikely for the dollar to gain traction.

 

In fact, I would bet against it. Although gold prices retreated last week, I expect the trend to continue until we hit a price of $2,000 per ounce.

 

On the economic calendar next week, investors will be treated to a whole host of numbers. At the top of the list will be home sales, existing and new. Look at those numbers to confirm a deflationary environment.

 

For the overall health of the economy, investors can digest the durable goods number. I suspect that number will show weakness.

All in all, I'm not comfortable being long only in this environment. We are overdue for a pause. I do not expect a serious correction but simply a pause.

 

As such, the only change to the list of five exchange-traded funds to buy this week would to exchange the regional banking ETF for a gold ETF.

 

Here are the five exchange-traded funds to buy this week:

 

SPDR Gold Shares (GLD) – Gold took a break last week. I want back in. The bias for gold is incredibly weighted to the upside. Demand combined with economic conditions in the United States bode well for those holding gold. My target for gold is $2,000. The move higher continues next week.

 

SPDR S&P Semiconductor (XSD) – Technology shares including semiconductor stocks were a bit weaker than expected last week. A positive sign for the group was the solid gain on the Nasdaq on Friday. I expect that move to continue this week with semiconductor stocks leading any sustained gains in the market.

 

SPDR Dow Jones Industrial Average (DIA) – The Dow Jones will be boringly steady this week. It is almost like watching paint dry and that is perfect for absolute return investing. We get our beta or volatility with the technology side of the market and our stability with the industrials. Don’t expect to the index to move strongly one way or the other next week.

ProShares Short Russell 2000 (RWM) – If the market does drop significantly next week we will get a big gain in holding the RWM. Small cap stocks have been very strong over the last two months. I expect the market to take back some of those gains next week.

 

ProShares Short S&P 500 (SH) – The S&P 500 is now up +6% for the year. That is not bad considering many expected the world to end and stocks to fall this year. Much of the gains have occurred over the last few months. It would be only natural to take a pause and this exchange traded fund will protect you should there be a correction to the downside next week.

 

Thus the only change this week is to sell the regional bank ETF and use the proceeds to take a position in the GLD.


For more ETF information and ETF research, follow these links.


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2Comments
Oct 25, 2010 3:54PM
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Financials are telling the truth, this is not a sustainable rally, First , the volatility then the market correction.
Oct 25, 2010 12:57PM
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Long-term Dow: looks like a big head and shoulders?
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